PROBLEM 3–16A Activity-Based Costing Cost Flows and Income Statement [LO2, LO5]

Aucton Corporation is a manufacturing company that uses activity-based costing for its external financial reports. The company’s activity cost pools and associated data for the coming year appear below:

Activity Estimated Expected Activity Cost Pool Measure Overhead Cost Activity Machining ............................ Machine-hours $180,000 1,000 MHs Purchase orders .................. Number of orders $90,000 600 orders Parts management .............. Number of part types $60,000 300 part types Testing ................................ Number of tests $150,000 250 tests General factory ................... Direct labor-hours $280,000 20,000 DLHs At the beginning of the year, the company had inventory balances as follows:

Raw materials ..................................................................... $7,000 Work in process .................................................................. $6,000 Finished goods ................................................................... $10,000 The following transactions were recorded for the year:

a. Raw materials were purchased on account, $595,000.

b. Raw materials were withdrawn from the storeroom for use in production, $600,000 ($560,000 direct and $40,000 indirect).

c. The following costs were incurred for employee services: direct labor, $90,000; indirect labor,

$300,000; sales commissions, $85,000; and administrative salaries, $245,000.

d. Sales travel costs were incurred, $38,000.

e. Various factory overhead costs were incurred, $237,000.

f. Advertising costs were incurred, $190,000.

g. Depreciation was recorded for the year, $270,000 ($210,000 related to factory operations and $60,000 related to selling and administrative activities).

h. Manufacturing overhead was applied to products. Actual activity for the year was as follows:

Activity Cost Pool Actual Activity Machining .............................................................. 1,050 MHs Purchase orders ................................................... 580 orders Parts management ................................................ 330 part types Testing ................................................................... 265 tests General factory ...................................................... 21,000 DLHs i. Goods were completed and transferred to the finished goods warehouse. According to the company’s activity-based costing system, these finished goods cost $1,450,000 to manufacture.

j. Goods were sold on account to customers during the year for a total of $2,100,000. According to the company’s activity-based costing system, the goods cost $1,400,000 to manufacture.

Required:

1. Compute the predetermined overhead rate (i.e., activity rate) for each activity cost pool.

2. Prepare journal entries to record transactions

(a) through ( j) above.

3. Post the entries in part (2) above to T-accounts.

4. Compute the underapplied or overapplied manufacturing overhead cost. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Post the entry to the appropriate T-accounts.

5. Prepare an income statement for the year.